When you buy a car for your business, you may be able to claim back some of the cost through capital allowances on cars.

These allowances are a form of tax relief. They let you offset part of the vehicle’s value against your profits, which lowers your tax bill. 

Note: The amount you can claim depends on the car’s emissions, whether it’s petrol, diesel, hybrid, or electric, and how much it’s used for business. It also depends on when you bought the car – the rates described below are for cars bought from April 2021.

This guide explains how the rules work, why electric car capital allowances are particularly generous, and what to watch out for when making a purchase.

Key points: Capital allowances on cars

  • You can claim capital allowances on cars to reduce taxable profits.
  • The rate of relief is tied to the car’s CO₂ emissions.
  • Electric car capital allowances can provide 100% relief in the first year.
  • If the car is also used for private journeys, only the business share counts.
  • Vans and commercial vehicles are treated differently and often give quicker tax relief.

Understanding capital allowances on cars

Capital allowances spread the cost of assets over several years, giving you tax relief gradually. 

Cars are treated differently from other items because you can’t use the annual investment allowance (AIA) for them.

Instead, you claim writing down allowances each year or, in some cases, a full deduction in the first year.

For those looking for more detail, we discuss annual investment allowance with regard to how corporation tax is calculated here.

How the rules work

Cars are placed into different “pools” depending on their CO₂ emissions. The pool determines how much you can claim back.

  • Main pool (18%) – applies to cars with lower CO2 emissions: 50g/km or less on cars bought from April 2021.
  • Special rate pool (6%) – applies to higher-emission cars: over 50g/km on cars purchased from April 2021.

Each year, you claim the allowance on the balance left in the pool. The car doesn’t get written off in one go, unless it qualifies for the more generous first-year allowance.

The reason for these “pools” is so HMRC can spread the tax relief over time.

Capital allowances on electric cars

Fully electric cars qualify for a 100% first-year allowance if they’re new and not leased. 

That means you can deduct the entire purchase price from profits in the same tax year.

The rule doesn’t apply to second-hand or leased electric cars. 

Plug-in hybrids fall under the emissions thresholds instead, so they may only qualify for the main or special rate pools.

Examples of capital allowances on cars

Here are two scenarios:

  • Example 1: Petrol car: A sole trader buys a petrol car for £20,000 with emissions of 120g/km. The car goes into the special rate pool, so they can claim 6% of the balance each year.
  • Example 2: Electric car: A company buys a brand-new electric car for £30,000. It qualifies for the 100% first-year allowance, so the full £30,000 can be claimed in year one.

These are simple examples. In practice, business structure, financing, and private use can all affect how much you can claim.

Mixing business and private use

When a car is used for both work and personal journeys, you can only claim the business share of the allowance.

So, if you drive 60% for work and 40% for personal use, only 60% of the claim is valid. Keeping a mileage log is essential, because HMRC may ask you to prove your numbers.

For more information about travel and subsistence expenses, check out our blog.

Vans and commercial vehicles

Vans, lorries, and most commercial vehicles don’t fall under the car rules. Instead, they usually qualify for the annual investment allowance (AIA).

That means you can often deduct the full cost in the first year, no matter the emissions. It’s one reason vans are a popular choice for trades and delivery businesses.

Keeping up with changes

Government rules on emissions and allowances shift over time. Thresholds for CO₂ have already changed several times, and future budgets may alter the relief for electric cars.

For now, electric vehicles offer one of the most generous forms of tax relief. But if you’re considering a purchase, it’s wise to check the latest rules before committing.

Of course, if you’re at all unsure, it’s worth speaking to an accountant.

FAQs: Capital allowances on cars

What are capital allowances on cars?

They’re a way of claiming tax relief on vehicles bought for business use. The amount depends on emissions and whether the car qualifies for special allowances.

Do electric cars qualify for capital allowances?

Yes. Brand-new, zero-emission cars qualify for a 100% first-year allowance, letting you claim the full cost in the year you buy them..

Can I claim if I use the car privately?

You can, but only for the business share. Private use has to be excluded, so accurate records are important.

How much capital allowance can I claim on a company car?

That depends on emissions. Low-emission cars go in the 18% main pool, high-emission cars in the 6% special rate pool, and electric cars may qualify for 100% relief.

Are hybrid cars treated the same as electric cars?

No. Hybrids are judged on their emissions. If they’re above the threshold, they go into the main or special rate pool instead.

Do vans and commercial vehicles count as cars for allowances?

No. They normally qualify for the annual investment allowance (AIA), which means the cost can often be deducted in full in year one.

Final thoughts 

We hope you found this article useful. Our blog is full of helpful guides and information – some of our most popular articles include:

Capital allowances on cars can ease the cost of buying a vehicle for your business. The rules depend on emissions, private use, and business type, but the current relief for electric cars is especially generous.If you’re planning to buy a car or van for your business, it pays to understand how these allowances work.

Accountants East London can guide you through the process and make sure you claim correctly – get in touch today for clear, practical advice.